Employee Mobility Popped by the Housing Bubble

As manager of relocation services for Minneapolis-based medical device company Medtronic Inc., Jeannie Comer oversees some 1,000 employee moves each year. Most years, the company has about five unsold homes in its inventory at any given time as a result of those moves. These days, she’s struggling to unload an average of 30 homes at a time.

"I would say during the last year that I am spending 25 percent more of my time managing the inventory of homes," Comer says.

Medtronic is hardly unique as corporations struggle to deal with a prolonged U.S. housing slump that has left relocation programs stuck with high-priced homes purchased from employees who have been moved to new locations. Dealing with the weak U.S. housing market has become the top priority for most corporate relocation officers.

While some companies have come up with creative ways of handling a growing inventory of unsold homes, there is apparently little attempt to curb relocation programs. The reason: A tight labor market makes it increasingly important for companies to get the right workers in the right locations, and that goal trumps relocation cost containment at the moment.

In its annual corporate relocation survey, moving company Atlas World Group Inc. found that nearly nine of every 10 companies planned to relocate the same or more employees in 2007 as in 2006. A similar number expected to spend the same or more on relocation in 2007. Only one in 10 expected to spend less on relocation in 2007.

Interestingly, while the weak housing market pushes up relocation costs for companies, an otherwise strong economy prompts companies to relocate more workers. In the Atlas survey, 59 percent said company growth was the main internal factor affecting relocation programs.

That growth is not just domestic but international.

As companies spend increasing amounts to relocate employees around the nation and globe, a number of trends are evident: Companies are quietly offering qualified new hires many of the same relocation benefits once reserved for existing employees, including home buyout options. The trend is operating under the radar at the moment.

In a new Prudential Relocation survey, nearly nine of 10 companies said they did not offer new hires the same home buyout option granted to top employees. But in a footnote to the survey, Prudential pointed out that its own experience handling corporate relocations contradicts what companies said in the survey: Qualified and highly sought-after new hires today typically get buyout relocation offers comparable to those offered to in-house transfers.

"These days, in an effort to address the employee reluctance to relocate and the tight labor market, companies are less concerned about whether they are dealing with a new hire or an existing employee and more concerned about the ability to relocate," says Kathy Morris, director of global consulting for Prudential Relocation.

Foreign expansion opportunities are drawing companies to more remote and potentially dangerous locations like the Middle East and rural parts of China. As a result, companies are spending more on hardship pay for international relocations while also using shorter rotations to accommodate employees who do not want to make long-term moves to foreign posts, often because they don’t want to relocate their families. Overall, international relocations are on the rise. Geoffrey Latta, executive vice president of ORC Worldwide, a global relocation services company, said the number of expatriates per company rose from 152 in 2000 to 196 in 2006, a 27.6 percent increase.

Companies have clamped down on relocation costs by limiting the amount of weight they will pay movers to transport, a reflection of the fact that people tend to accumulate more stuff today than they once did. According to the Atlas survey, 81 percent of companies had no weight restriction on moves in 1977. By 1997, that figure had dropped to 65 percent. This year, it’s 42 percent. But there are also some special shipping benefits that certain companies offer: 14 percent will move a relocated employee’s boat, and 24 percent will move pets.

The rise in two-income households has further complicated relocation and prompted increasingly generous benefits for a relocated working spouse. Companies now frequently offer job search, training and education assistance for the working spouse of a transferred employee, and sometimes the company will even offer the spouse a job if one can be found that doesn’t share the same reporting line.

"I do not know of any company that actually replaces a spouse’s salary," Morris says. "But more and more, we are seeing some benefit afforded to those dual-income couples."

Carrying homes By far, the topic most on the minds of corporate relocation managers these days is the housing slump. "Within the U.S., the biggest issue is the change in the housing market," says Cris Collie, executive vice president of Worldwide ERC, the association for workplace mobility. "We know that inventories are up two to three times what they were in the past."

The problem differs by region and can result in significant long-term costs. Dennis Taylor, a senior consultant with Runzhezimer International, an employee mobility services company, says that homes acquired by relocation programs after employees were unable to sell them typically remain unsold for another 45 to 60 days now, up from an average inventory of 15 days two years ago. Homes often end up in inventory for up to 180 days now in locations hit hard by the real estate slump.

"In Detroit, God only knows how long," Taylor says. "Companies have told me that they have million-dollar homes that their brokers have told them they can expect to keep for four to five years."

That means paying mortgages, taxes, insurance and maintenance on empty homes so employees can be moved to new locations. Those carrying costs typically average 1.5 percent to 2 percent of the value of the home per month. On a $500,000 home, that could mean $10,000 per month just in carrying costs. On top of that, companies that buy hard-to-sell homes from relocated employees often take a substantial loss when those homes finally sell.

"The biggest decision companies have to make is when to accept an offer," Taylor says. "If you have a million-dollar home and somebody offers $850,000, are you willing to take the loss, or can you afford to hold it? That is what companies are fighting right now."

Until recently at Medtronic, the company typically lost no more than 5 percent when it took over a relocated employee’s unsold home and then found a buyer. These days, Comer says, Medtronic is losing 10 percent to 15 percent per house. And with executive homes now priced at $500,000 and up, the extra costs from losses and carrying expenses could add millions to Medtronic’s relocation expenses.

One way to control costs would be to reduce relocation benefits. But a tight labor market has increased competition for talent, which puts pressure on companies not only to maintain existing relocation benefits but also to expand and enhance them. In a recent ERC survey, 87 percent of corporations said they expected difficulty finding enough qualified workers in 2007. The competition for talent means corporations need to offer generous relocation packages to stay competitive.

The push to get qualified candidates to the right location puts extra pressure on human resources departments, where corporations typically house their relocation offices. Relocation officers find themselves caught between corporate financial types who want to rein in relocation spending and strategic planners who argue for expanding relocation benefits to ensure that enough talented workers are hired and retained during the current tight labor market.

"It’s a dilemma," Medtronic’s Comer says.

In the Prudential survey, more than three of every four companies said they try to balance the need for premium relocation services with cost containment. But of those who said they favor one strategy over the other, most opted for premium service over cost containment. The breakdown: 17.8 percent said they structure their relocation policy to favor premium service, while only 4.6 percent said they favor cost containment even if it means reducing relocation benefits.

Adjusting to the market The bias toward premium relocation packages is one of the factors that has helped push up the inventory of unsold homes purchased from employees. Runzheimer’s Taylor says companies are turning to a variety of strategies to deal with those rising home inventories. Some have put houses up for auction in hope of spurring a sale. Companies are also taking steps to combat the barren look of vacant homes devoid of furnishings. Some companies put rented furniture in those homes. Another option: moving families into vacant houses, sometimes rent-free, just to give the property a lived-in look.

"Companies are going back to basics, doing things that were done when the market wasn’t so good," Taylor says.

One of the biggest issues at the moment is exactly how to structure and compute the buyout option in top-level relocation packages. Under most buyout options, companies agree to purchase homes that don’t sell from relocated employees.

Those buyout options can have a number of variables. An employee might be asked to try to sell the home for a certain amount of time before the buyout option kicks in. A company might require that it approve the listing price to ensure that employees don’t overprice their homes.

Companies might also require that certain pre-qualified real estate agents be hired to market the homes. And finally, the company can set buyout prices at levels that reflect the true market value of homes, which often can be far less than what employees think their homes are worth.

Because homes are staying on the market longer, some companies have lengthened the period that a relocated employee must market a home before it becomes eligible for a corporate buyout. Four-month marketing periods have been stretched to six months, nine months and sometimes 12 months. That makes the employee responsible for carrying costs on the home for a longer period of time. Companies are also adding requirements that offers made during the marketing period be presented to the corporation for possible approval even if the employee thinks the offer is too low.

Corporate expenses also are climbing because of the loss-on-sale provision, which is offered in the most generous relocation packages. A corporation will make up for the loss an employee suffers when a home sells for less than its original purchase price. During the boom market, that clause rarely came into play. Now it is a key source of increased relocation expenses, and companies are looking closely at how they manage the payouts.

The problem has been aggravated because so many employees tapped for relocation purchased homes during the boom period. Prudential’s Morris said more companies are adopting the loss-on-sale provision to deal with that growing group of employees who, when they find themselves facing a potential loss on the sale of their homes, might opt not to relocate. Morris said companies feel compelled to extend the loss-on-sale provision more often these days to persuade those needed workers to relocate to critical locations.

"If you have the skills and are willing to relocate, that would work in your favor," Morris says.

But for many relocation candidates who have seen the market value on their homes drop, the loss-on-sale provision won’t apply. The loss is computed only on the difference between what the house was purchased for and what it sells for—not on what the house might have been worth during the recent boom period.

Employees who have owned their homes for a number of years might find that corporations will offer substantially less than they expected, with no one to make up the difference. That sort of reality check can be difficult for some relocating employees to accept, particularly if the new job doesn’t represent a substantial pay and status increase.

Taylor says one result of the housing slump is that employees are frequently turning down relocations that don’t come with significant pay increases. "It is tough to move someone laterally right now," Taylor says. "No increase in pay and title, basically the same job in a new location—it’s tough to do."

Struggling with the domestic real estate market promises to be a challenge for corporate relocation officers for some time to come, as they try to manage rising inventories and costs and still persuade employees to relocate. "Domestically, the real estate market is the key, and it will continue to be for 2007 certainly," Morris says.